Rich Lists Don’t Point to True Wealth of the Financial Elite

We all want to make it onto the Rich List someday, don’t we? One wouldn’t necessarily have to want to live a lavish lifestyle, but just want an easier life. Massive amounts of cash can provide that. There may be something that these Rich Lists are not showing and like most aspects of life, what isn’t being said is just as important as what is.

The Rich Lists

We have all seen these lists and looked at them with varying degrees of envy. As Forbes, The Sunday Times and here in Ireland, The Sunday Independent release the ranking of the richest people in society I think it is a natural human reaction to want a piece of the pie. So, how are these lists compiled?

Kerry A. Dolan of Forbes explains; “We keep track of their moves: the deals they negotiate, the land they’re selling, the paintings they’re buying, the causes they give to. To estimate billionaires’ net worths we value individuals’ assets, including stakes in public and private companies, real estate, yachts, art and cash–and account for debt. Not that we pretend to know what is listed on everyone’s private balance sheet, though some folks do provide that information. We do attempt to vet these numbers with all billionaires. Some cooperate, others don’t.

“Privately held companies are valued by coupling estimates of revenues or profits with prevailing price-to-revenues or price-to-earnings ratios for similar public companies.”

Looking at this quote, a person would be right in thinking there is a lot of guesswork involved and it is not always accurate. A fact that Nick Webb of Sunday Independent points out; “However, financial digging can only uncover so much, and the size of the fortunes may actually be much bigger – or indeed, lower – than our estimates. But things change very fast for the rich as fortunes are made and lost.” It is just possible that the super rich are keen to keep their fortunes a secret. Now, this could down to an issue of personal privacy. This can be easily understood. However, there may be an insidious side to this too.

Hedge, Slush and Mutual Funds

So what are these funds we hear of from time to time in the media? Well, we’ll start with mutual funds as they are probably the most benign. Taken from Investopedia, a mutual fund is; “An investment vehicle that is made up of a pool of funds collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments and similar assets.” The reason I highlight this fund is because it illustrates how a legitimate investment can distort the true wealth of the people on these lists. People could make a killing on a mutual fund and the journalists behind the rich lists would be none the wiser. Along with these the legitimate mutual funds, we have funds that are murky and just plain illegal.

A slush fund by it’s very nature is illegal. Again, Investopedia comes to the rescue; “Money earmarked for a loosely defined, but legitimate, purpose that is instead surreptitiously used for an illegitimate purpose. The term “slush fund” indicates a fraudulent use of money. For example, if a politician siphoned off tax payments that were supposed to fund public goods and used the money to pay for a lavish vacation, the stolen money would be referred to as a slush fund.”

How slush funds relate to the people on our lists is this. The rich have been known to put money aside to bribe politicians or members of boards that can in some way influence decisions that will make them even richer. I am not stating that all the members of the rich lists are corrupt and carry out this process, but you would have to be fairly naive to think that none of the people on these lists have done it at least once. We can take Denis O’ Brien as an example. The money he put into a bank account for Michael Lowry to later withdraw is a slush fund because O’ Brien was later awarded Ireland’s second mobile phone license.

The Hedge Fund

Hedge funds are legal, but, as will be discussed later, they belong to a murky and mostly unregulated world. It is a great way of increasing wealth. If you have the money to invest in the first place that is. Sham Gad describes them thusly; “There are more specific characteristics that define a hedge fund, but basically because they are private investment vehicles that only allow wealthy individuals to invest, hedge funds can pretty much do what they want as long as they disclose the strategy upfront to investors. This wide latitude may sound very risky, and at times it can be. Some of the most spectacular financial blow-ups have involved hedge funds. That said, this flexibility afforded to hedge funds has led to some of the most talented money managers producing some amazing long-term returns.”

The way these hedges funds operate is interesting as Gad continues; “My operating agreement – the legal document that says how my fund works – states that I will receive 25% of any profits over 5% per year, and that I can invest in anything anywhere in the world. Ten investors sign up, each putting in $10 million, so my fund starts with $100 million.

“Of course, many hedge fund managers get vilified for earning such exuberant sums of money. But that’s because those doing the finger pointing – often the newspapers – fail to mention that my investors made $305 million. When is the last time you heard an investor in a hedge fund complain that his fund manager was getting paid too much?

“It’s the 2% that gets the criticism, and it’s not difficult to see why. Even if the hedge fund manager loses money, he still gets 2% of assets.” He also claims they are big business and estimates they are worth as much as $1 trillion. Further adding; ”

One aspect that has set the hedge fund industry apart for so long is the fact that hedge funds face little money-management regulation. Compared to mutual funds, pension funds and other investment vehicles, hedge funds are the least regulated. That’s because hedge funds are only allowed to take money from “qualified” investors – individuals with an annual income that exceeds $200,000 for the past two years or a net worth exceeding $1 million excluding their primary residence. As such, the Securities and Exchange Commission deems qualified investors suitable enough to handle the potential risks that come from a wider investment mandate.

“But make no mistake, hedge funds are regulated, and recently they are coming under the microscope more and more. Hedge funds are so big and powerful that the SEC is starting to pay closer attention. And breaches such as insider trading seem to be occurring much more frequently, an activity regulators come down hard on.” Make of that what you will, I find it all a bit dubious.

There does seem to be a wild west element to this form of investment as Gad listed a number of attributes linked or unique to hedge funds in the article, including; “Often employ leverage: Hedge funds will often use borrowed money to amplify their returns. As we saw during the financial crisis of 2008, leverage can also wipe out hedge funds.” This just the start of practices that should be outlawed when it comes to hedge funds. Obviously the people making these investments would be secretive about these dealings so they would make as difficult as possible for any journalist, or member of the law for that matter, to find out.

Further Criticism of Financial System

John Paulson is often credited as being an investment genius. He made billions from the crash because he bet it would happen. Katya Wachtel in Business Insider takes up the story; “His suspicion that the sub-prime mortgage market would eventually trigger a catastrophic economic crisis, made him billions and catapulted him from little known portfolio manager to Wall Street superstar.

“”Paulson was virtually alone in predicting the fallout from the housing bubble,” Henny Sender of the FT wrote in 2009. “Although that view now appears obvious, Mr. Paulson made tens of billions of dollars for his investors and himself in 2006 and 2007, thanks to it.”” Thanks to the crisis, something we all say every day I’m sure. There’re two ways of looking at this, it’s either great opportunism or else it is unfair that Paulson should profit from the misery that was inflicted on others. There is something that must be considered that isn’t obvious at first and it’s this; if Paulson had knowledge that was going to happen what would be the best way of profiting? It’s like betting on a horse race you already know the result of. I’m not saying Paulson did know, I wouldn’t be surprised if he did, though. I am just pointing it out as a possibility because many others profited from the crash in much the same way.

Goldman Sachs

Did any of the banks see the crash coming? Of course they did and some even turned it to their advantage as Greg Gordon of McClatchy Newspapers explains; “In 2006 and 2007, Goldman Sachs Group peddled more than $40 billion in securities backed by at least 200,000 risky home mortgages, but never told the buyers it was secretly betting that a sharp drop in U.S. housing prices would send the value of those securities plummeting.

“Goldman’s sales and its clandestine wagers, completed at the brink of the housing market meltdown, enabled the nation’s premier investment bank to pass most of its potential losses to others before a flood of mortgage defaults staggered the U.S. and global economies.

“Only later did investors discover that what Goldman had promoted as triple-A rated investments were closer to junk.” Ian Hislop also pointed this out on an episode of Have I Got News for You?

Gordon goes on further; ” A Goldman spokesman, Michael DuVally, said that the firm decided in December 2006 to reduce its mortgage risks and did so by selling off subprime-related securities and making myriad insurance-like bets, called credit-default swaps, to “hedge” against a housing downturn.

“DuVally told McClatchy that Goldman “had no obligation to disclose how it was managing its risk, nor would investors have expected us to do so … other market participants had access to the same information we did.””

The difference between Greg Gordon and those writing for Forbes is Gordon is not afraid to call it for what is rather than the money worshippers at Forbes. “”The Securities and Exchange Commission should be very interested in any financial company that secretly decides a financial product is a loser and then goes out and actively markets that product or very similar products to unsuspecting customers without disclosing its true opinion,” said Laurence Kotlikoff, a Boston University economics professor who’s proposed a massive overhaul of the nation’s banks. “This is fraud and should be prosecuted.””

Conclusion

No wonder law and order is breaking down. A system where the people controlling the finances can lie and mislead people is doomed to failure. They get away with it because by and large nobody is watching and the rest of us find out when it is too late. Let’s be clear, hedges funds are just a form of gambling. This coupled with insider information means these companies can turn over a serious profit while the rest of us are left to burn.

Consider this. The banks sold houses to well-intentioned people who, on the bank’s advice, felt they could pay off their mortgages. Meanwhile, the banks were betting on the opposite to happen. So it is in now the banks interest to see these people fail on their payments. It’s not too far-fetched to imagine the banks putting pressure on governments to help them in this regard. Remember the slush funds? Most of the board of Goldman are now working in the Obama administration, let’s not forget. So, this isn’t too far of a leap.

Then what happened? After squeezing as much money as they could out the mortgage payers, the banks then reposed the homes, making good on their bet. They asked for a bailout then that the taxpayer, the very ones paying the mortgages, paid for. Then they sold the houses on again. To quote ‘Bodie’ Broadus from The Wire; “This game is rigged, man.”